Monday, June 4, 2012

Debunking Austrian Economics 101

I have assembled below a set of links to various posts on my blog for debunking the theories of Austrian economics.

Please note that not all the posts actually debunk Austrian theories, as some are merely descriptive, and allow the reader to understand what the Austrians believe. Some examine the history of the school. A few posts are even constructive in that Post Keynesians and some Austrians can agree on certain points (such as the posts on Ludwig Lachmann).

One important point I have always stressed is that the Austrian school itself is heterogeneous.

In my view, a useful division of modern Austrians would be as follows:

Some of the first generation Austrians were actually progressive liberals and sympathetic to Fabian socialism. Hayek came to support public works and fiscal policy in a depression. Ludwig Lachmann accepted government intervention for economic stability in depressions, and rejected even the idea that free markets tend to general equilibrium.

(9) Against the Austrian View of Deflation
Some Austrians think deflation is desirable; others do not. Hayek most notably changed his mind and condemned “secondary deflation.” The Austrians hold inconsistent views on deflation.

(26) Debunking Austrian Ethical Theories
There are at least two positions taken by Austrians on ethics: (1) some (like Mises) support a kind of utilitarianism/consequentialism, and (2) others support natural rights (Rothbard) or argumentation ethics (Hoppe).

It is, of course, that they are marginal and have virtually zero influence on policy. But I do actually criticize neoclassical theory as well.

There are many other good heterodox/progressive economics blogs about that debunk mainstream neoclassical economics (e.g., Steve Keen) so I try to add something original to what's available by providing a critique of Austrians.

I sometimes wonder why my disillusionment with internet Austrianism was so sudden. But I see it was pretty far from sudden - you and other bloggers and other columnists had worked prolifically for days, months, and years to refute every misconception.

You could compile all this data into a book that would comprise the most comprehensive criticism of the Austrian School. Of course, book publishing is difficult and expensive business.

Awesome. I've linked this at the new Critiques Of Libertarianism under Austrian Economics. I'm so grateful for this work! For two decades I've endured claims by Austrians without much ability to respond besides various blanket dismissals. And I really haven't wanted to do the serious, hard labor of mastering enough literature to show that they are fools.

We probably wouldn't have "Austrian economics" of the Mises/Rothbard sort in the U.S. now if Mises hadn't found a patron in the ad man Lawrence Fertig. Fertig apparently bribed New York University into giving Mises an office and pretending that he had a job there as a "visiting professor." Fertig then paid Mises a salary from his own pocket. While working on Fertig's dime, Mises revised and translated one of his German-language books and published it as Human Action in the U.S. From hindsight it looks as if Fertig hired Mises as an outside contractor to create an advertising campaign in support of Fertig's political views.

As someone who identifies himself as a libertarian in the mold of Hayek or Friedman, I too have observed time and time again the overreach of "web intellectuals" who read or watch some videos on the Mises Institute site, or read some Rothbard and voila, have seen through all the delusions of modern economics. The most insufferable by far are the Lew Rockwell/Murray Rothbardians - they just rant about the evils of the state non-stop. They seem to have no idea that the ideas they prattle on about have been thoroughly examined before they were born.

However, I do want to make two general points that I learned by informally studying Austrian economics on my own. I'm not claiming to be some seer, or an economic genius, but I am familiar with many of the criticisms this author has pointed out as well as many Austrian economists ideas. I was deeply affected by their thinking, so let me summarize in plain English why. I welcome feedback - but I will not engage in pseudo-intellectual, faux-academic debate as I'm not an academic. That said, my thoughts follow.

1. Praxeology - While it is not a complete answer methodologically, it gave me a renewed focus on micro-economics when thinking about the economy. We are so used to seeing macro-economic aggregates that I think many people see them as disconnected from individual action , rather than a result of it. In particular, it made me see how private exchanges of property (in a legal framework that protects rights) are uniquely wealth creating activities. In fact, it's the sharpness of these dealings that is the engine of wealth creation. Once you get that the individual has complex interests they are trying to satisfy (they don't seek equilibrium), and have unique knowledge of time and place that are crucial in optimizing these transactions to maximize wealth creation, it's hard to listen to some politician talk about govt "creating jobs" or other such nonsense.

2. Methodological critique - Hayek and other's critique of economic methodology provides real insight into why say the current monetary policies we are pursuing are not creating growth. I did not realize how full a criticism existed of such thinking (while acknowledging that there is wide disagreement about this among even free market economists).

I'm not going to debate all the abstruse aspects of these ideas - I can tell that the author has deep knowledge of economics, well beyond what I possess. However, these ideas taught me more about economics than say my macro textbook, written by Heilbronner (who finally admitted defeat in the "Socialist Calculation Debate" in '89).

There is essentially little difference between the methodology of the two. If you don't believe me, read Popper's 'Models instruments and truth' in his book myth of the framework. In many ways, Mises was way ahead of Popper in methodology - it was just that neither of them realised it.